Finance Articles

Refinancing Your Home Mortgage Following Bankruptcy

Bankruptcy is the last step for most people who are undergoing tough financial times. Many people fear that by declaring bankruptcy they will ruin their credit for the rest of their lives, but they find that they are able to begin rebuilding credit immediately after the bankruptcy becomes final.

Get Your Debt under Control

Bankruptcy offers you the opportunity for a fresh slate with your finances. Your old debt will be wiped clean; however, any years of established credit are gone as well. Bankruptcy can be a real stress relief if you are in a desperate situation, but it is important to realize what has brought you to that point. If you declare bankruptcy and then continue without changing your spending habits, you are destined to end up in a similar situation again. The best way to use bankruptcy is as a learning tool. Know where you lost control of your spending, and be ready to move on from there.

Lower Your Expenses

One of the best ways to lower your expenses is to refinance your home mortgage. You may think that finding a lender to refinance your home mortgage following bankruptcy will be nearly impossible, but that is not so. Depending on your situation you may be able to walk into a bank the day after your debts are discharged by the bankruptcy court and refinance your home mortgage. If you have a good deal of equity in your home, you will find it much easier to refinance following a bankruptcy.

Even if you do not have a good deal of equity, you should be able to refinance your home mortgage within six months to one year from the final date of your bankruptcy. While you are waiting to refinance your home there are several steps that you can take to make yourself more attractive to lenders. Pay all of your bills on time. This includes your current mortgage as well as any utility, student loan, or other bills that you have following the bankruptcy. Do not attempt to open other lines of credit, such as new credit cards or lines of credit at stores. While credit is important, if your number one goal is to refinance your mortgage after a bankruptcy, you do not want to appear to the bank that you are in danger of falling into the same credit trap that you found yourself in prior to your initial bankruptcy.

Why Refinance Your Home Mortgage After a Bankruptcy?

What are the benefits of refinancing your home mortgage after a bankruptcy? There are many benefits to this actually. By refinancing your mortgage you can lower your monthly payments in a variety of ways. You can extend the length of the loan or refinance at a lower interest rate, both of which will lower your monthly payment. While you will be considered a higher risk loan, and will not receive the lowest interest rate available, it is still possible that your interest rate may be lower than when you initially closed on your mortgage.

Another reason to consider refinancing your home mortgage after a bankruptcy is that this will automatically start you on the path to repairing your credit. The refinance will show up as a new loan. The older loan, which due to the financial problems that brought about your bankruptcy may have had late payments or missed payments, is closed. The new loan will show no late payments or penalties.

Where to Refinance

Too often, people feel that the black mark left by bankruptcy is an obstacle that they cannot overcome. Rather than shopping for a mortgage, they go directly to a sub prime lender, or worse, a lender who involves themselves in predatory loan practices. While sub prime lenders do have their place, they should not be your first choice. Lenders who involve themselves in predatory practices, such as excessively high interest rates, or interest compounded on an irregular schedule should be avoided at all costs. They will not help you.

Sub prime lenders are not likely to provide you with as low of an interest rate as you can receive from a traditional lending institution. Following a bankruptcy, your first stop in refinancing your home should be the lender that holds your mortgage currently. Not only do they know your payment history, and the home, they may also save you some money in closing costs by keeping the loan "in house". If they are not willing to refinance your mortgage, ask them what you should do to make yourself more attractive. If they recommend that you come back after three to six months, which is probably the best advice. If they are not interested in refinancing your mortgage, don't let it discourage you, shop mortgages at other traditional lenders.

Craig Elliott is a freelance writer who writes about topics pertaining to the mortgage industry such as Mortgage Company | Home Mortgage Lender

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